Flawed Investing is Depleting Pension Assets

Bogle on the cover of Common Sense on Mutual Funds
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There is little to no evidence that past performance is any indication of future success. A globally diversified portfolio would improve results for most if not all participants.

One of the criteria used to select these managers was their past performance. Three years before hiring they beat their benchmarks by an impressive 2.91 percentper year. For the three years post-hiring, these investment stars underperformed their benchmark by an average of 0.47 percent per year.[See 7 Signs of a Good 401(k) Plan.]

The hiring and firing cycle continued. Underperformers were fired. But here’s the twist. After being fired, the excess returns of the fired managers on average were better than their replacements. The lesson is clear: Past performance is not predictive of future performance. Here’s a simpler way to put big bucks in the pockets of pension plan beneficiaries:

  • Fire all plan consultants who try to pick funds that will beat the markets.
  • Eliminate all actively managed funds (where the fund manager attempts to beat a designated benchmark), hedge funds, and private equity funds from pension plan portfolios.
  • Limit investments to a globally diversified portfolio with an allocation of approximately 60 percent stocks and REITS and 40 percent bonds, using only passively managed funds from firms like Dimensional Fund Advisors and Vanguard.

Picking mutual funds based on performance is a huge mistake by many plan sponsors. Essentially, this method tries to find funds which beat the market. The results in most, if not all, cases are very disappointing.

Please comment or call to discuss how this can affect you and your employees.

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